Uninformed Decisions = Unintended Consequences
My name is Jack. I recently graduated from the University of Pennsylvania with a BS degree in finance. I work as a financial analyst at a really good company in Philadelphia. Let me describe how I learned that uninformed decisions often cause unintended consequences.
I grew up in Charlotte, North Carolina, attended their public schools, got good grades and was active in sports and the community. I have a younger sister who is now a college sophomore. Both my parents work, my dad is a Customer Support Manager and my mom started teaching after staying home to raise us kids. Together they earn about $150,000 a year. We have a nice house, comfortable lifestyle, two cars and we travel to interesting places.
When I graduated from high school, I knew I wanted a career in finance. I applied to several colleges and was accepted by most. I filled out my FAFSA to see how much financial assistance I could receive and to my parents and my surprise; I wasn’t eligible for any assistance because of my parents’ income.
My parents worked hard to earn their lifestyle and have only modest savings earmarked for retirement. They neglected to save for my sister’s and my education.
We were elated with my college acceptances, particularly Penn, an Ivy League university with its famous Wharton School. My Award Letter indicated that my Total Cost of Attendance was estimated at $65,000 per year and that they offered a $1,000 Penn Scholarship. The remaining $64,000 would have to be provided by my family, student borrowing and myself. My parents had originally planned to pay $25,000 per year, but increased it to $30,000 and urged me to choose Penn because of its exceptional reputation. This is a large part of their annual take-home pay and they are willing to limit their lifestyle during my college years to help me attain my education. Certainly, my future jobs would fund my loan repayment.
I lived a modest lifestyle and worked during my school years. When I graduated two years ago, I owed $125,000 at an average interest rate of 5%. I decided to stay in Philadelphia and found a financial analyst job starting at $40,000 annually and I now make $48,000: $4,000 monthly gross and about $3,000 monthly after all taxes and withholdings. I’m doing well and expect annual salary increases. Philadelphia is an expensive city so I live and work near public transportation. I have a roommate to share rent and I don’t own a car.
I’ve budgeted and pay about $750 monthly toward my student loans, which cover $520 of interest and a small reduction of loan balance. Two years from now I expect to be earning about $55,000 and will have a loan balance of $120,000 that I’d like to pay off in ten years. This will require monthly payments of $1,275 for the full ten-year period – ending when I’m 35 years old. I expect further salary increases and, with careful budgeting and spending discipline, I can do it. Thoughts of marriage, family, a house, nice vacations and some savings for retirement, feel beyond me. For example, if five years from now, I earn $75,000, my monthly take home pay will be about $4,400. My student loan payment of $1,275 and modest saving of $500 per month reduce my actual available monthly income to only $2,625, similar to now even with 56% higher salary.
I recently attended my high school reunion in Charlotte and spoke with my good friend Tom who had very similar family economics and high school academics. I described my economic situation to Tom and he simply smiled. Tom was also accepted by leading universities, but chose to attend University of North Carolina, Chapel Hill. UNC, a state university, is nationally ranked 30th among all universities. If UNC didn’t accept him, he would have chosen UNC – Charlotte, also a fine school, but not as highly ranked. In-state tuition and fees at UNC are about $9,000 per year and Tom was able to graduate with no student loans and having his parents pay far less than mine. While Tom earns less than me, Charlotte is far less expensive than Philadelphia. He owns a car and is engaged to marry. He’s saving money to buy a house and he fully participates in his company’s 401K-retirement savings plan.
It struck me that my life will be impacted for 15 years, until age 35, by choices my family and I made several years ago. We had superior alternatives, but never saw and seriously explored them. I’m tough and determined. I’ll work hard to accelerate my salary growth and I’ll control expenses to pay off my loans in less than 10 years. When I do start a family, I’ll understand that I need to save and invest in their future.
Jack is fictional, but his economics are real. I created Jack’s family economics as a typical upper middle-income family with limited savings beyond their home. Jack’s financial situation: college expenses, financial aid, salaries, cost of living and loan repayment were generated using Zenie Foundation’s College Affordability Tool Kit, see zeniefoundation.org.
Although Jack and his parents could have made more judicious financial decisions, Jack’s isn’t a story of financial ruin; rather it’s a story of a strong young adult learning from his experiences and rising to his challenges. Go Jack.
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